Buying commercial real estate is rarely simple. Environmental concerns, financing requirements, inspections, and other unexpected issues can complicate a seemingly straightforward transaction.
As a recent California Court of Appeal decision illustrates, the language of a purchase agreement, and any amendments to that agreement, can become critical when complications arise.
In Nasey v. Fell Holdings LLC, the Court of Appeal was asked whether a buyer who failed to close a $10.5 million real estate purchase could shift the blame to the seller for not providing certain disclosures and refusing to permit additional environmental testing. The court said no.
Laurence Nasey had owned and operated businesses from two properties on Fell and Stanyan Streets in San Francisco for decades. In 2020, he lost title to the properties in a foreclosure sale.
Rather than leaving, Nasey negotiated with the new owners to remain in possession of the properties, pay rent, and eventually buy them back.
In the purchase agreement the parties signed in September 2020, Nasey agreed to buy both properties for $10.5 million. The agreement called for an initial deposit and required the transaction to close by May 31, 2021.
The agreement described the transaction as an “ALL CASH OFFER” and expressly stated that it was not contingent on Nasey obtaining a loan.
The deal did not close on the specified date. The parties agreed to extend the closing deadline, and by September 2022, Nasey had been given several additional opportunities to complete the purchase.
But by then, another problem had emerged.
When Nasey sought financing for the purchase, he obtained a Phase I environmental report as required by the prospective lender. The report identified possible contamination.
The lender then said it needed to see a more extensive Phase II assessment before it would consider funding the transaction. The Phase II assessment required drilling through the concrete flooring to obtain five small soil core samples, each approximately the diameter of a quarter.
Nasey was willing to pay for the testing, but the purchase agreement said the sellers had to give prior written consent for invasive or destructive investigations. The sellers’ representative refused to consent.
As a result, Nasey was unable to close escrow by the final deadline of September 29, 2022.
More than a year later, Nasey filed a lawsuit asking the San Francisco Superior Court to declare that he was not in breach of the agreement, making several arguments.
First, he argued that California law required the sellers to provide a Transfer Disclosure Statement, and that his obligation to close was not triggered until he received this disclosure.
Second, he said the sellers had failed to make disclosures about hazardous substances required by the Health and Safety Code. (The court found that Nasey had not alleged that the sellers knew, or had reasonable cause to believe, that a hazardous substance release had occurred.)
Third, he claimed that he had a contractual right to conduct the Phase II environmental assessment, and that the sellers’ refusal to permit the assessment prevented him from performing his obligations, thus suspending his duty to close.
The trial court dismissed the case at the pleading stage, without leave to amend, after Nasey had twice revised his complaint. Nasey appealed, but the Court of Appeal affirmed the lower court’s decision.
The appellate court’s analysis focused on the language of the initial agreement and subsequent amendments to it.
California courts generally do not interpret a contractual provision as creating a “condition precedent” – an event that must occur before a party has a contractual obligation to perform – unless the agreement clearly indicates that the parties intended one.
Here, the court found no such language tying Nasey’s obligation to close escrow to his receipt of a Transfer Disclosure Statement. In fact, later amendments pointed in the opposite direction.
The first addendum said the purchase was “not subject to any contingencies” and was being made on an “as is, where is” basis, with no seller representations.
A subsequent addendum expressly stated that the sellers had no obligation to provide documents or disclosures under the purchase agreement. Later addenda acknowledged that the sellers had performed their obligations and were not in default.
Because of those provisions, the appellate justices determined that the disclosure requirement was not a condition precedent to Nasey’s performance.
They reached a similar conclusion regarding the Phase II environmental assessment and its impact on financing for the deal.
Nasey argued that, even though the contract described the transaction as an all-cash purchase, the sellers knew he would need financing.
But the court noted that the parties had expressly addressed the risks associated with financing and environmental reviews.
Nasey’s offer was not contingent on obtaining a loan. It gave him only 17 days to conduct his investigations, and stated that invasive or destructive investigations required the sellers’ advance written consent.
These provisions, the justices concluded, allocated the risk to Nasey.
The ruling offers a useful lesson for anyone entering into a significant real estate transaction.
First, details matter. A seemingly minor provision buried in a lengthy form agreement may have a very significant effect, especially after the parties negotiate subsequent addenda.
Second, buyers should pay particular attention to financing contingencies, inspection periods, environmental investigations, and provisions governing invasive testing. If a buyer needs additional time or testing, these issues should be addressed expressly when negotiating an amendment that extends the closing date.
Finally, calling a transaction “all cash” and “as is” can be very important in determining how the parties have allocated risk.
The Court of Appeal’s message is straightforward: when the parties have expressly agreed on how the risks of a transaction are to be allocated, a court generally will not rewrite their bargain simply because those risks later become reality.
By James K. Andrade